EVOLUTIONS INC, 10-K, 1997-09-22

EVOLUTIONS INC
10-K, 1997-09-22
MISC DURABLE GOODS

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

-----------------------------------------------------

(Mark one)

[ X ] Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 (No Fee Required) for the FISCAL YEAR ENDED DECEMBER 31, 1996

[ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 (No Fee Required) for the transition period from __________ to
__________
Commission File Number 0-27788

EVOLUTIONS, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 22-3420712
(State of Incorporation) (I.R.S. Employer Identification No.)

266 Harristown Road, Glen Rock, New Jersey 07452
(Address of principal executive offices and zip code)

(201) 493 - 9595
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock (par
value $.01 per share)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes No X

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants' knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

Indicate the number of shares outstanding of each of the registrant's classes of
stock as of the latest practicable date.

Class Outstanding at September 19, 1997
------- ---------------------------------
Common Stock, $.01 par value 6,562,280*

* Reflects the 0.033-for-1 stock split of February 1996

The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $459,360 as of September 19, 1997.

Documents Incorporated by Reference: See Index to Exhibits.

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PART I

Item 1. BUSINESS

INTRODUCTION

Evolutions, Inc., a Delaware corporation (the "Company") merged with
Gold Securities Corporation ("Gold"), an Idaho corporation, in February 1996 for
the purpose of changing the state of incorporation from Idaho to Delaware. The
Company trades publicly on the NASDAQ electronic bulletin board under the symbol
"EVOI" and prior to the merger traded on the NASDAQ electronic bulletin board
under the symbol "GLDS." Gold was incorporated in 1922 under the name of Kaniksu
Mining Company ("Kaniksu"). In 1981, Kaniksu merged with Gold, and adopted that
company's name. In July of 1995, Gold entered into a reverse merger with EVO
Manufacturing, Inc., a company incorporated in the State of New Jersey ("EVO").
The majority owner of EVO, PureTec Corporation ("PureTec"), a publicly held
specialty plastics and plastics recycling company, retained ownership of 74% of
the outstanding common stock of the Company after completion of the July 1995
reverse merger. EVO was the only operating subsidiary of the combined companies
at the time of the July 1995 merger. For accounting purposes, the transaction
was treated as the acquisition of Gold by EVO. As a result, the Company's
financial statements consist of the results of operations of EVO since its
inception in 1994. In February 1996, the Company effected a 0.033-for-1 reverse
stock split. All share amounts reflect this split.

On September 27, 1995, Kidsview, Inc. ("KVI"), a wholly owned
subsidiary of the Company, purchased certain assets of Direct Connect
International Inc. ("DCI") consisting primarily of a licensed line of toy
animals marketed under the trade names TEA BUNNIES (Registered Trademark) and
ZOO BORNS (Registered Trademark). In consideration, the Company, among other
things, released DCI of an aggregate of $950,000 in indebtedness to the Company.
In addition, the Company agreed to issue to DCI 49,500 shares of its Common
Stock. Up to an additional 132,000 shares of the Company's Common Stock will be
issued to DCI if over a period of three years certain net sales and earnings
tests are met in connection with the business acquired from DCI. Under the terms
of the agreement between the Company and DCI, KVI and DCI entered into a
management agreement pursuant to which DCI will continue to manage the business
relating to the toy animals for a monthly fee of up to $100,000 through December
1995 and up to a maximum monthly fee of $85,000 thereafter. The first $150,000
of these fees have been offset against DCI's indebtedness to the Company under a
secured note in the amount of $150,000. As part of the original loan to DCI by
the Company, DCI issued to the Company warrants to purchase up to 100,000 shares
of DCI common stock at $0.10 per share and 250,000 shares of DCI common stock at
$0.20 per share.

In February 1996, the Company acquired substantially all the assets of
Smart Style Industries, Inc. and Affiliates (collectively "SSI") in exchange for
$1,125,000 cash, a thirty-day, promissory note in the amount of $500,000,
$1,000,000 in notes, payable in quarterly installments with Common Stock of the
Company valued at $1,000,000, the assumption of approximately $1,200,000 of
liabilities, and warrants to purchase an additional 100,000 shares of Company
Stock. An additional $1,000,000 will be payable in stock if certain operating
results are achieved over the next five years. On December 1, 1996, the terms of
SSI sale were renegotiated. SSI received from the Company 700,000 shares of the
Company's Common Stock in settlement of the $1,000,000 of notes and SSI
relinquished the $1,000,000 payable in stock

<PAGE>

upon reaching certain operating results. The Company operates these assets
through its wholly- owned subsidiaries, Smart Style Acquisition Corp., Lions
Acquisition Corp. and Lions Holding Corp. (collectively "SSA"). SSA is a
manufacturer and marketer of children's apparel. The Company's line of recycled
apparel products will be combined with SSA's business operations.

In connection with the SSI acquisition, SSA also acquired a license to
use the H.W. Carter & Sons, Inc.'s ("H.W. Carter") Watch the Wear (Registered
Trademark) label. The license agreement provides for a 3% royalty on all sales
of the H.W. Carter label to be paid to H.W. Carter, with a minimum annual
payment of $100,000. The initial term of the agreement is for three years with
thirty-three options to renew for additional three year periods held by SSA. On
December 1, 1996, the H.W. Carter license was renegotiated to a $52,000 minimum
annual payment.

On September 9, 1996, KVI entered into a license agreement with Sandbox
Entertainment, Inc. ("SEI") with respect to Pillow People (Trademark) stuffed
toy and doll products. The license is exclusive and KVI can only sell Pillow
People in the United States, its territories and possessions and Canada.
However, the license grants KVI worldwide manufacturing rights. The license
expires on December 31, 1998. KVI has the option of renewing the license for one
three-year term, upon 60 days notice prior to the end of the initial term. The
royalty rate ranges from 6% to 10% based on sales in the United States and from
8% to 10% based on FOB sales. Pursuant to the license agreement, KVI made an
advance payment to SEI of $50,000 with a minimum guarantee, due by the end of
the initial term, of $200,000. With respect to renewal of the license agreement,
KVI will be obligated to make an advance payment, due on the first day of the
renewal term, of $100,000 with a minimum guarantee, due by the end of the
renewal term, of $400,000.

In April 1997, SSA ceased its apparel manufacturing operations and
laid-off all employees at its Gastonia, GA location involved in the
manufacturing process.

On April 30, 1997, SSA sold its Cutecumber (Registered Trademark) line
to Snake Creek Manufacturing Co., Inc., for cash and a future royalty, the
proceeds all of which were made payable to Heller Financial, Inc., ("Heller") in
accordance with SSA's financing agreement with Heller.

Effective April 30, 1997, the management agreement between DCI and KVI
was terminated. KVI has not generated any revenue since April 30, 1997, and
there can be no assurance that KVI will be successful in generating revenues in
the future.

On May 2, 1997, the owner of the H.W. Carter Watch the Wear (Registered
Trademark) label terminated SSA's rights to the license.

On May 15, 1997, SSA's secured lender, Heller Financial, Inc.,
foreclosed on substantially all of the assets of the apparel subsidiaries.
Effective June 6, 1997, the subsidiaries filed for protection under Chapter 11
of the Bankruptcy Code. SSA is in the process of actively seeking the return of
preference payments made ninety days prior to the bankruptcy. Proceeds will be
used for secured creditors and any remaining balance will be distributed to
priority creditors.

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On July 15, 1997, the license for KVI's rights to market TEA BUNNIES
(Trademark) was terminated by the licensor.

For certain information about the apparel and toy business segments,
see Note 19 to the Consolidated Financial Statements included in Item 8 to this
Form 10-K.

OPERATIONS

In April 1997, SSA ceased operations. From SSA's inception through
April 1997, SSA was engaged in the following businesses:

APPAREL

Product Lines

The Company was initially established for the purpose of developing and
expanding markets for apparel products manufactured from recycled materials that
promote environmental awareness. In 1995, the Company began to pursue vertical
expansion in the apparel industry and in 1996 purchased the operations of SSI
and acquired the license for the H.W. Carter Watch the Wear (Registered
Trademark) label.

SSA manufactured a varied line of apparel for many age groups. The Wee
Willie (Registered Trademark) line included pants and vest sets made from
polyester or poly/ cotton blends and was marketed to infants and toddlers, sizes
4 to 7 and sizes 8 to 20. Additionally, SSA marketed suits made from poly/cotton
blends under the names Elliot Stevens (Registered Trademark) and Sim Daniel
(Registered Trademark) and these items were marketed to toddlers, sizes 4 to 7
and sizes 8 to 20. The Wee Willie (Registered Trademark), Elliot Stevens
(Registered Trademark) and Sim Daniels (Registered Trademark) lines were known
for their quality holiday wear.

Also, SSA manufactured a diverse line of denim and corduroy items.
Cutecumber (Registered Trademark) produced denim and corduroy jumpers for
infants and toddlers in sizes 4 to 7. The H.W. Carter Watch the Wear (Registered
Trademark) lines included denim, corduroy and twill carpenter pants, painter
pants and overalls for junior sizes. The garments manufactured by SSA under the
H.W. Carter label were garments that had been traditionally termed "work
clothes," namely, jeans and overalls. However, they were also marketed in retail
stores that carry popular "urban styles."

Manufacturing

A majority of SSA's holiday items were produced in its facility located
in Gastonia, North Carolina. SSA did subcontract a significant amount of piece
work. The Cutecumber (Registered Trademark) line was manufactured by
subcontractors in Haiti, the Elliot Stevens (Registered Trademark) line was
subcontracted to manufacturers in Mexico and the H.W. Carter's (Registered
Trademark) line was subcontracted to a plant in Nicaragua. SSA was not party to
any long term contractual or other arrangements with any specific subcontractor.

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Raw Materials

The principal raw materials used in the production of SSA's products
were denim, corduroy, twill, polyester and poly/cotton blend fabrics. The
sources and availability of raw materials for the apparel products were
abundant. SSA purchased goods both from domestic and foreign sources and there
were many suppliers.

Marketing and Distribution

SSA marketed its apparel to department stores and catalog houses. The
primary target market was the United States. Some of the major accounts which
ordered SSA's products included Kmart, Wal-Mart, Sears, JC Penney and
Nordstroms. SSA accepted returns and issued credits to the customer. SSA had
many different discount outlets to resell returned items.

Seasonality

Sales differed amongst the various apparel lines. The Cutecumber
(Registered Trademark) line produced consistent sales throughout the year. The
H.W. Carter line was generally consistent and peaked during "back to school"
time, which meant the line's heaviest shipments occurred in the months of July
and August. The Wee Willie (Registered Trademark), Elliot Stevens (Registered
Trademark) and Sim Daniels (Registered Trademark) lines were holiday wear with
peak sales between August and March. Light shipments from April through June
generally resulted in negative cash flow for that period which was traditionally
offset by positive cash flow starting in September. SSA carried inventory
because it shipped large orders. SSA produced a substantial portion of its goods
against firm orders. SSA accumulated a large inventory position during the
months of November through February.

Competition

The main competitive conditions in the apparel industry are price and
service. Many of SSA's competitors imported their goods and were able to offer
better pricing. As a domestic manufacturer, SSA was able to offer quicker turn
times for shipping and could capture business if customers under ordered and
needed goods quickly at the end of the seasons. Most of SSA's competitors were
much larger and had much more resources.

Product Liability

SSA maintained product liability coverage in the amount of $1,000,000
which was the amount acceptable to SSA's customers. SSA had not been the subject
of any product liability litigation. As of April 30, 1997, SSA no longer
maintained product liability insurance.

Inflation

SSA had not been materially affected by the impact of inflation.

TOY PRODUCTS

On April 30, 1997, DCI and KVI dissolved their management agreement.
From KVI's inception through April 30, 1997, KVI was engaged in the following
businesses:

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Product Lines

In September 1995, the Company's wholly-owned subsidiary, KVI, acquired
the licenses to two toy products, TEA BUNNIES (Trademark) and ZOO BORNS
(Trademark), and entered into an agreement to retain the services of key
management personnel from DCI. DCI managed these product lines and was
responsible for the development of new products.

The ZOO BORNS (Trademark) product line was discontinued by management
in early 1996.

The TEA BUNNIES (Trademark) product line was introduced in 1995. TEA
BUNNIES (Trademark) toy products combine fashion doll and tea party play value
and were positioned in the "mini-doll" market in order to achieve status as a
"collectible," which KVI believed was beneficial in the procurement of repeat
sales. On July 15, 1997, the licensor terminated KVI's rights to the license.

TEA BUNNIES (Trademark) are a group of bunny-like characters that live
in the fantasy town of Sunny Bunny Bay. KVI had developed a range of toy
miniature dolls and play accessories depicting these characters. Each Tea Bunny
featured a specific flower in its ears and lives in a matching tea cup house or
shop.

Manufacturing

KVI did not manufacture any of its toy products. Instead, KVI
contracted, through Amerawell Products, Ltd., a Hong Kong subsidiary of DCI,
("Amerawell") for the manufacture of its products by third parties, primarily in
China. Contracting decisions were made on the basis of price (including freight
charges and customs duties), availability of payment terms, quality, reliability
and the ability to meet KVI's timing requirements for production in relation to
delivery schedules. KVI believed that its manufacturing arrangements were
advantageous to KVI in providing quality products at reasonable prices, with
prompt responses to orders. KVI incurred none of the fixed costs involved in
owning its own factories, and the flexibility provided by this arrangement
allowed KVI to seek out the best manufacturing terms available. However, the use
of third party manufacturers reduced KVI's ability to control directly the
timing and quality of the manufacturing process. Delays in shipment or defects
in products could result in a loss of orders which could have a material adverse
effect on KVI. Substantially all contracted manufacturing services were paid by
either letter of credit or telegraphic transfer only upon the proper fulfillment
of terms established by KVI such as adhering to product quality, design,
packaging and shipping standards and proper documentation relating thereto. All
products purchased were made and paid for in U.S. dollars.

KVI was not a party to any long-term contractual or other arrangements
with any specific supplier. A substantial portion of KVI's product was produced
by two manufacturers, Tri-S Manufacturing Co., and Well World Toy Co., Ltd. KVI
arranged for the making of its products with such manufacturers who, in turn,
subcontract for the manufacture of components of these products with
unaffiliated third parties also located in the Far East. These companies used
KVI's tools and molds.

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Raw Materials

The principal raw materials used in the production and sale of KVI's
toy products were plastics, plush and printed fabrics and paper products, all of
which were available at reasonable prices from a variety of sources. KVI's tools
and molds (which are approximately six years old and are in good working
condition) and package designs, which were owned by KVI, were designed both by
KVI and by third parties and were engineered and produced for KVI in the Far
East. KVI directly, or through its sales representatives, took written orders
(standard purchase orders) for its products and arranged for the manufacture of
its products as discussed above. Cancellations were generally made in writing,
and KVI took the appropriate steps to notify its manufacturers of such
cancellation. The manufacturers generally shipped KVI's products by commercial
ocean carrier pursuant to instructions from KVI's customers

Marketing and Manufacturing

KVI marketed its products to major toy, discount department stores,
drug chains and catalog companies. The primary target market was the United
States. KVI also distributed its products in Canada. Substantially all of KVI's
sales were made on a direct import bases to customers, F.O.B. Far East port, and
payments were made by irrevocable letter of credit or telegraphic transfer. As a
result, on those sales, KVI did not have to finance inventory or offer credit
terms to the customer. This reduced much of the risk that is commonly associated
with a fashion business such as toys. During 1997, KVI's management decided to
focus on domestic shippings due to better profit margins, however, at greater
risk to KVI. KVI was required to maintain adequate levels of inventory to ensure
availability of goods to customers which required additional working capital.
Virtually all of the products manufactured have been tested for safety by
independent laboratories contracted by KVI and its retail customers. The results
of these tests indicated that the products shipped by KVI met industry and
government standards. KVI's customers had the right to appoint a representative
to inspect KVI's product before shipment. If they did not elect to make an
inspection, a representative of KVI did so. Generally, payment for the products
under the letter of credit will not be made unless inspections are completed. At
that point, KVI's general policy was that such sales were final, and product
returns were not permitted. However, should a defect have occurred in the
product or if sales of the product did not meet the customer's expectations, KVI
intended to support its customers by making a product exchange or providing a
cash allowance. KVI believed that the toy industry generally followed this
policy.

Seasonality

The seasonality of the toy business varied by product line. The TEA
BUNNIES (Trademark) product line was predominately a spring item with sales in
January, February and March leading up to the Easter holiday; if Easter was
late, the season was longer. The Pillow People (Trademark) product line was
being designed to be a year round item with the heaviest shipping from July
through December for the Christmas holiday.

Product Liability

KVI maintained product liability coverage in the amount of $1,000,000
which was the amount acceptable to the KVI's customers. KVI had not been the
subject of any product liability litigation. As of April 30, 1997, KVI no longer
maintained product liability insurance.

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Competition

The market for toy products is highly competitive and sensitive to
changing customer preferences and demands. KVI believed that the quality of its
products enabled it to compete effectively and achieved positive product
reception and position in retail outlets. However, there are toy products which
are better known than the products developed and distributed by KVI. There were
also many companies which were substantially larger and more diversified, and
which have substantially greater financial and marketing resources than KVI, as
well as greater name recognition, and the ability to develop and market products
similar to, and more competitively priced than, those developed and distributed
by KVI.

Trademarks

The products offered by KVI have generally been licensed on an
exclusive basis whereby KVI paid a percentage of sales in return for product
design and development services and an exclusive right to use the copyrighted
and trademark names of the property. KVI bought the rights to these copyrights
and trademarks for its products in order to protect certain features of the
products and to prevent unauthorized copying of protected features, which could
have materially adversely affected the sales volume of such products. Many of
the designers and developers that had such arrangements with KVI have a history
of enforcing their trademarks and copyrights to the extent necessary to prevent
copying. However, it is possible to create artwork and names that convey a
similar concept to a proprietary product that may not infringe on KVI's rights.
Therefore, KVI believes that its past success was dependent upon ongoing
development of new products and product concepts as well as on trademark and
copyright protection. There can be no assurance that KVI will operate
successfully in the future.

Government Regulation

KVI was subject to the provisions of, among other laws, the Federal
Hazardous Substances Act and the Federal Consumer Product Safety Act. These laws
empower the Consumer Product Safety Commission (the "Safety Commission") to
protect children from hazardous toys and other articles. The Safety Commission
has the authority to exclude from the market articles which are found to be
hazardous and can require a manufacturer to repurchase such toys under certain
circumstances. Any such determination by the Safety Commission is subject to
court review. Similar laws exist in some states and cities in the United States
and in Canada and Europe. KVI believes that its products were in compliance with
the aforementioned acts.

The United States government has established a Generalized System of
Preferences which now provides favorable duty status to certain of KVI's
products that are imported into the U.S. from certain countries in the Far East.
The Generalized System of Preferences is administered by the Office of the U.S.
Trade Representative. It is possible that these products, which were now
imported on a favorable duty status from certain countries, may lose such
status. In such case, products imported from such location into the U.S. would
be subject to duties ranging from approximately 5% to 30%. While KVI's
competitors whose products are manufactured in the Far East also may be
affected, KVI's profit margin may be materially adversely affected.

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Inflation

KVI has not been materially affected by the impact of inflation.

Employees

The Company currently has no employees.

Item 2. PROPERTIES

Approximate
Location Function Square Lease
Feet Expiration

Glen Rock, NJ Corporate Offices and 3,000 2001 (1)
KVI headquarters

New York, SSA division headquarters 6,000 2001 (2)
NY and three showrooms

Gastonia, NC SSA apparel 60,000 Owned (3)
manufacturing

Gastonia, NC SSA apparel 60,000 1997 (2)
manufacturing

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(1) SSA is the tenant on this lease.

(2) SSA is the tenant on these leases. SSA is no longer party to these leases as
these leases were voided by the bankruptcy court.

(3) The premises have been foreclosed on by SSA's lender.

Item 3. LEGAL PROCEEDINGS

SSA's secured lender, Heller Financial, Inc., has foreclosed on
substantially all of the assets of the apparel subsidiaries. Effective, June 6,
1997, the subsidiaries have filed for protection under Chapter 11 of the
Bankruptcy Code. SSA is in the process of actively seeking the return of
preference payments made ninety days prior to the bankruptcy. Proceeds will be
used for secured creditors and any remaining balance will be distributed to
priority creditors.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of security holders in 1996.

<PAGE>

PART II

Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS.

The Company's Common Stock was listed on the Spokane Stock Exchange on
June 26, 1986. The Spokane Stock Exchange ceased operations in May 1991. The
prices reflected below for the years 1996 and 1995 are from brokers that have
quoted and traded the stock as it was listed on the NASDAQ Bulletin Board and
"Pink Sheets" under the trading symbol "GLDS" through February 1996 and the
symbol "EVOI" from February 1996 forward. The prices reflect the 0.033-for-1
stock split authorized by the shareholders in February 1996.

Calendar Quarter High Low
- ----------------- ------ ----
First 1995 $5.16 $1.55
Second 1995 $3.61 $1.55
Third 1995 $4.64 $1.55
Fourth 1995 $5.15 $1.55

First 1996 $3.00 $1.25
Second 1996 $5.00 $3.00
Third 1996 $4.00 $3.00
Fourth 1996 $3.00 $1.75

The Company has approximately 330 record holders of its Common Stock
and believes that the approximate total of beneficial holders of the Common
Stock of the Company to be in excess of 500, based on information received from
the transfer agent and those brokerage firms who hold the Company's securities
in custodial or "street" name.

The Company has not paid any cash dividends and does not anticipate
paying any cash dividends in the foreseeable future.

Item 6. SELECTED FINANCIAL DATA

The selected financial data presented below for the Company's statement
of operations for the years ended December 31, 1995 and the period of January
21, 1994 (inception) to December 31, 1994 and the balance sheet at December 31,
1995 and 1994 are derived from financial statements which have been audited by
Holtz Rubenstein & Co., LLP, independent public accountants, and are included in
Item 8 to this Form 10-K. In July 1995, Gold and EVO consummated a reverse
merger. For accounting purposes, the transaction was treated as the acquisition
of Gold by EVO. As a result, the Company's financial statements consist of the
results of operations of EVO since its inception in 1994.

<PAGE>

The financial statements for the year ended December 31, 1996 are
unaudited. Due to the Company's financial position, the Company did not have the
monies necessary to have Holtz Rubenstein & Co., LLP, independent public
accountants for the past fiscal year, complete the audit.

Statements of Operations Data:

Period of
January 21,
Year Ended Year Ended 1994
December 31, December 31, (inception) to
1996 1995 December
(Unaudited) 31, 1994
----------- ---------- -------------

Revenues $ 21,521,910 $ 571,326 $ 124,281
Net loss from
continuing operations (11,640,120) (1,602,952) (341,538)
Net loss per share $ (1.77) $ (0.52) $ (0.27)
Weighted average
shares of common
stock outstanding 6,562,281 3,079,358 1,265,297

Balance Sheet Data:

December 31, December 31, December 31,
1996 1995 1994
(Unaudited)
------------ ------------ -----------
Working capital (deficit) $(4,618,401) $ (502,010) 456,457
Total Assets 7,171,888 2,579,766 556,522
Long-term liabilities -- -- --
Stockholders' Equity (4,063,621) 824,589 463,068

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction
with the Financial Statements and notes thereto included in Item 8 to this Form
10-K. For the year ended December 31, 1995, this discussion does not include any
results of the operations acquired from SSA, as these acquisitions occurred
after the close of the 1995 calendar year. In July 1995, Gold and EVO
consummated a reverse merger. For accounting purposes, the transaction was
treated as the acquisition of Gold by EVO. As a result, the Company's financial
statements consist of the results of operations of EVO since its inception in
1994.

<PAGE>

Results of Operations

Fiscal 1996 compared to 1995

The Company had net sales of $21,521,910 for the year ended December
31, 1996 as compared to $571,326 for the year ended December 31, 1995. The
increase in net sales is primarily attributable to the Company's acquisition of
SSI in February 1996. The apparel segment recorded sales of $12,432,880 and
$349,226 for the years ended December 31, 1996 and 1995, respectively, and
operating loss was $2,810,781 and $523,012 for the years ended December 31, 1996
and 1995, respectively. The toy segment recorded sales of $9,089,030 and
$222,100 for the years ended December 31, 1996 and 1995, respectively, and had
operating losses of $2,821,280 and $575,000 for the years ended December 31,
1996 and 1995. The increase in toy segment sales can be attributed to the fact
that the year ended December 31, 1996 includes a full year of sales and the year
ended December 31, 1995 only includes sales from September 27, 1995 (date of
purchase) through December 31, 1995.

Gross margin for the Company was $4,443,853 for the year ended December
31, 1996 as compared to $137,544 for the year ended December 31, 1995. The
increase in gross margin is attributable to an increase in the apparel segment,
which had a gross margin of $230,076 as compared to $27,320 for 1995 and the toy
segment which was $4,213,777 for 1996 compared to $110,224 for 1995.

During 1996, the Company sold the remaining 230,000 PureTec shares and
recorded a loss of $611,146 on the sale. The Company had received these shares
from PureTec in March 1995 as a capital contribution.

In the year ended December 31, 1996, the Company wrote-off fixed assets
of $1,844,135; $587,890 was attributable to the toy segment and $1,256,245
related to the apparel segment.

Additionally, the Company wrote-off intangibles relating to the toy
segment of $1,234,761 and $1,574,384 from the apparel segment.

The Company had a net loss of $11,640,120 for 1996 as compared to a net
loss of $1,602,952 for 1995.

Fiscal 1995 compared to 1994

The Company had net sales of $571,326 for the year ended December 31,
1995, as compared to $124,281 for the period of January 21, 1994 (date of
inception) through December 31, 1994. The increase in net sales is attributable
to volume increases made by the Company in the apparel business and the addition
of the toy line revenues due to the acquisition of the toy licenses from DCI.
The Company had two distinct operating segments in 1995. The apparel segment
recorded sales and operating losses of $349,226 and $523,012, respectively, for
the year ended December 31, 1995. The toy segment recorded sales and operating
losses of $222,100 and $575,000, respectively, for the year ended December 31,
1995. The Company only operated in the apparel segment in 1994.

<PAGE>

The Company had a net loss of $1,602,952 for 1995 as compared to a net
loss of $341,538 for 1994. The Company had a significant increase in expenses in
1995 as compared to 1994. During 1995, the Company recorded a bad debt expense
related to a contractor who was producing goods for the Company. The contractor
had been advanced $198,814 as of December 31, 1994. At December 31, 1995, this
advance was determined to be unrecoverable. The Company also had a significant
increase in interest expense during 1995 as compared to 1994. The increase is
attributable to loans received from affiliates and related parties which were
used to finance the purchase of the toy licenses. The decrease in interest
income from 1994 to 1995 is due to the reduction in cash balances as funds were
used in operations of the Company.

The Company experienced a significant increase in gross profit during
1995 as compared to 1994. The majority of the increase is attributable to the
toy division, which had sales of $220,100 and a gross margin of $110,224 for
1995. In addition, the recycled content apparel division sold off all remaining
inventory by the end of 1995. The sales and gross margin during 1995 were
$349,226 and $27,320, respectively, as compared to sales and gross margin of
$124,281 and $(92,108) for 1994.

The Company experienced a significant loss on its portfolio of marketable
securities. The principal component of the Company's portfolio is the 350,000
shares of PureTec stock the Company received as a capital contribution from
PureTec in March 1995. The market value of the stock on the date it was received
was $5.50 per share, amounting to $1,925,000. The value of the stock
significantly declined in August 1995. During 1995, the Company sold 120,000 of
the PureTec shares and recorded a loss of $360,000 on the sale. The remainder of
the loss on sale of securities related to other securities acquired during 1994
and sold during 1995. In addition to the recognized loss on sale of securities,
the Company recorded and unrealized holding loss of approximately $623,000 on
securities available for sale.

Financial Position, Liquidity and Capital Resources

The Company had a working capital deficit of approximately $4,618,401
at December 31, 1996 and $502,010 at December 31, 1995. The increase in working
capital deficit is attributable to the Company's acquisition of SSI and the
expansion of the toy business and due to the Company's bankruptcy status, all
loans and the mortgage are in default and thus classified as current
liabilities.

Bridge Notes

In February and March of 1996, the Company borrowed an aggregate of
$3,000,000 from various outside sources (the "Bridge Lenders"). In exchange, the
Company issued to the Bridge Lenders notes (the "Bridge Notes") for the face
amount of the loans due May through August 1996. The Bridge Notes accrue
interest at the rate of 8% per annum. In addition, the Company issued to the
Bridge Lenders warrants to purchase a total of 3,700,000 shares of the Company's
Common Stock. The exercise price of the warrants is $3.50 per share of stock
purchased and expire five years from the date of issuance. In May 1996, the
Company borrowed an additional $100,000 on terms identical to the original
Bridge Notes and used those proceeds to repay some of the expiring Bridge Notes.

In October 1996, $100,000 of Bridge Notes were converted into the
private placement, as fully described below, and, in addition, the Company
converted $400,000 of Bridge Notes into

<PAGE>

a Convertible Note bearing interest at 8%. The terms allow the holder to convert
the Convertible Note into the private placement until the due date on April 22,
1997. The balance of the Bridge Notes totaling $450,000 have been converted into
Demand Notes. As of December 31, 1996, the Company had $850,000 of original
Bridge Notes outstanding. The Convertible Notes and Demand Notes are currently
in default.

Private Placements

In March 1996, the Company offered a private placement of its
securities. The placement consisted of 500,000 Units at a purchase price of
$5.00 per unit. Each Unit consisted of two shares of the Company's Common Stock
and one Stock Purchase Warrant to acquire one share of the Company's Common
Stock at an exercise price of $3.50. The Stock Purchase Warrants will expire
five years from the date of issue. As of December 31, 1996, the Company had sold
a total of 475,750 Units in this offering for total proceeds of $2,378,750. Of
the funds received, $1,900,000 were from the conversion of Bridge Notes into the
private placement and the balance was direct investments in the private
placement.

In May 1996, the Company commenced a second private placement of its
securities. The placement consisted of 600,000 Units, each consisting of two
shares of the Company's Common Stock, and one Stock Purchase Warrant to acquire
one share of the Company's Common Stock in exchange for $3.50, at a purchase
price of $5.00 per Unit. The Stock Purchase Warrants will expire five years from
the date of issue. As of December 31, 1996, the Company had sold a total of
440,000 Units in this offering for total proceeds of $2,200,000. Of the funds
received, $100,000 was used for the repayment of Bridge Notes, and the balance
has been used for working capital.

One of the investors in the private placement was DCI. As part of the
consideration for their 160,000 Units, DCI transferred to Evolutions equity
securities of a publicly traded unrelated third party with a fair market value
of $800,000. The Company subsequently transferred these securities to repay
$800,000 of outstanding Bridge Loans. The Company recognized no gain or loss on
these transactions.

Loans Payable

At December 31, 1996, the Company had loans payable and accrued
interest of approximately $148,000 consisting of secured notes to relatives and
affiliates of Michael Nafash, CEO, President and a Director of the Company. The
notes are due on demand and bear interest at the rate of 12% per annum. The
notes are secured by 25,000 shares of Glasgal Communications, Inc. common stock
and all other marketable securities held by the Company. On May 29, 1997, the
noteholder foreclosed on the collateral and has since accepted the collateral as
full payment of the debt. At that date, the collateral had a market value of
approximately $100,000.

Factoring Arrangements

<PAGE>

both subsidiaries' uncollected accounts receivable up to a limit of 90%. SSA may
over advance on this facility by up to $1,000,000. Interest accrues at the prime
rate plus 1%. Additionally, a fee of 0.75% is due on invoices assigned. The
facility can be canceled by either party on sixty days written notice. This
facility is collateralized by the accounts receivable and finished goods
inventory of SSA and EVO and guaranteed by the Company. This facility supersedes
the facility entered into in February 1996 between the SSA and First Factors,
Inc. As part of the agreement, Heller has indemnified First Factors, Inc.
against all outstanding over advances and uncollected accounts receivable.

In April 1996, KVI entered into a financing agreement with Heller
Financial, Inc. whereby KVI may take advance on uncollected accounts receivable
up to a limit of 90%. Interest accrues on monies advanced at the prime rate plus
2%. Additionally, a fee of 1% is due on amounts advanced. This facility is
guaranteed by the accounts receivable and domestic inventory of KVI and also by
the Company. Because of the bankruptcy proceedings with SSA, Heller advised KVI
that it would no longer make advances to KVI.

On May 15, 1997, Heller foreclosed on substantially all of the assets
of SSA. Effective, June 6, 1997, the subsidiaries filed for protection under
Chapter 11 of the Bankruptcy Code. SSA is in the process of actively seeking the
return of preference payments made ninety days prior to the bankruptcy. Proceeds
will be used for secured creditors and any remaining balance will be distributed
to priority creditors.

Mortgage Payable

In May 1996, SSA refinanced the existing mortgage on its production and
warehouse facility located in Gastonia, North Carolina with Branch Bank & Trust
Co.("BB&T") The $750,000 loan bears interest at the prime rate plus 1.5% payable
monthly. The term is for 35 months, with principal payments of $4,166.67 due
monthly beginning June 1, 1996, and a balloon payment at May 1, 1999 of
$604,166.55. The loan is collateralized by the property and guaranteed by the
Company. On July 29, 1997, BB&T foreclosed on the property due to SSA's
inability to meet the mortgage payments.

Convertible Debentures

On August 15, 1996, the Company issued convertible debentures in a
principal amount of $250,000. The debentures carry an interest rate of 3.0% and
are due on December 31, 1996. The debentures are convertible, on or after
September 24, 1996, into Common Stock at a rate equal to 67% of the average bid
and ask price on the date of conversion. The funds raised though this financing
was exclusively used for the repayment of the Bridge Notes. On September 29,
1996, $50,000 of the proceeds was converted into 21,322 shares of the Company's
Common Stock. On December 31, 1996, the remaining balance of $200,00 was
converted into 132,669 shares of the Company's common stock.

Cash Flow

The Company currently has no cash flows from operations.

Net cash used in operating activities for 1996 was $4,216,147 which was
comprised of an increase in inventory of $3,857,991 and a net loss of
$11,640,120 adjusted for non-cash charges

<PAGE>

for the write-off of intangible assets of $2,638,145, the write-off of fixed
assets of $1,844,135 and depreciation and amortization of $554,015 which was
partially offset by an increase in accounts payable of $3,668,857, an increase
in accrued expenses of $1,555,456, and an increase in payroll taxes payable of
$935,659. The Company funded the above activities, acquired Smart Style
Industries for $1,038,237, expended $802,612 for additions to property, plant
and equipment, and repaid debt of $2,605,250 through proceeds from debt
borrowings of $4,013,583 and net borrowings from factor of $638,421.

The Company's statement of cash flows for 1995 reflects cash used in
operations of $202,681, which is a result of the net loss of $1,602,952 offset
by an increase in accounts payable of $634,455, a loss on sales of securities of
$407,538, bad debt expense of $199,195, and an increase in accrued expenses of
$119,171. Net cash used in investing activities, approximated $903,000, which
reflects an increase in loans receivable of $1,100,000 from DCI. These loans
were canceled in connection with the asset acquisition and management agreement
with DCI in September 1995. The Company funded operating and investing
activities from financing activities, consisting of loan proceeds of $795,000
and capital contributions of $300,000.

Inflation

The Company has not been materially affected by the impact of
inflation.

Item 8. FINANCIAL STATEMENTS

The financial statements commence on Page F-1.

Item 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE

The financial statements for the year ended December 31, 1996 are
unaudited. Due to the company's financial position, the Company did not have the
monies necessary to have Holtz Rubenstein & Co., LLP, independent public
accountants for the past fiscal year, complete the audit.

On September 27, 1995, the Company's Board of Directors appointed Holtz
Rubenstein & Co., LLP ("Holtz Rubenstein") as independent auditors of the
Company for 1995. This was ratified by shareholder vote on February 2, 1996.
Holtz Rubenstein was appointed upon the resignation of Terrence J. Dunne, CPA
("Dunne") of Spokane, Washington which resignation became effective September
27, 1995. Dunne had been the principal auditor of the Company since March 1995.
Dunne's reports on the financial statements of the Company for the fiscal year
ended December 31, 1995 did not contain any adverse opinion, disclaimer of
opinion, modification or qualification as to uncertainty, audit scope or
accounting principles. During the time of his engagement there were no
disagreements with Dunne on any matter of accounting principles and practices,
financial statement disclosure, or audit scope and procedure, which
disagreement, if not resolved to the satisfaction of Dunne, would have caused
him to make reference to the subject matter of the disagreement in connection
with his report.

Dunne replaced Daniel Murphy, CPA, as the Company's independent auditor.
Mr. Murphy had served in such capacity during February and March 1995 and prior
to January 1995.
16

<PAGE>

During the intervening period, the Company engaged as its independent auditor
the firm of Bayaa & Dimeglios, CPA ("Bayaa").

Messrs. Murphy's and Bayaa's reports on the financial statements of the
Company for the fiscal year ended December 31, 1995 did not contain any adverse
opinion, disclaimer of opinion, modification or qualification as to uncertainty,
audit scope or accounting principles. During the time of their engagement there
were no disagreements with Messrs. Murphy or Bayaa on any matter of accounting
principles and practices, financial statement disclosure, or audit scope and
procedure, which disagreement, if not resolved to the satisfaction of Mr. Murphy
and Bayaa, would have caused them to make reference to the subject matter of the
disagreement in connection with their report.

PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Name and Age Position
- ------------ --------
Michael Nafash, 35 Chairman, Chief Executive Officer, President
Robert O'Brien, 61 Director
Paul Litwinczuk, 43 Vice President and Secretary, Director
Mark Mastroianni, 34 Vice President, Director
David C. Katz, 56 Director

On April 16, May 1, May 1, and May 12, 1997, Messrs. Mark Mastroianni,
Paul Litwinczuk, David Katz and Robert O'Brien, respectively, resigned as
members of the Company's Board of Directors. The only remaining member of the
Board is Michael Nafash, President and Chief Executive Officer. None of the
resignations involved any disagreement with the Company on any matter relative
to the Company's operations, policies or practices.

Mr. Nafash has been Chairman, President and Chief Executive Officer of
the Company since July 1995. He has been the president of EVO Manufacturing
since its inception in February 1994. From June 1992 until March 1995, he worked
for PureTec, where he served as Chief Financial Officer from October 1993 to
March 1995. Prior thereto he had been a partner with Michaels, Nafash &
Georgallas, Certified Public Accountants.

Mr. O'Brien had been President and a Director of Gold Securities since
1982. He resigned from his position as President in July 1995. In addition from
1985 until July 1993, Mr. O'Brien was Secretary, Treasurer and a Director of
Inland Resources, Inc. formerly known as Inland Gold and Silver Corp., a
publicly traded company involved in the exploration of oil and gas.

Mr. Litwinczuk has served as Secretary of the Company since July 1995 and
as a Director since February 1996. Mr. Litwinczuk has served as Secretary of
PureTec since July 1995. From September 1991 until July 1995, he was Assistant
Secretary of that company. Prior to 1991, Mr. Litwinczuk was Administrative
Manager with REI Distributors, Inc. a company engaged in glass recycling and
fabrication of reprocessing equipment.

Mr. Mastroianni has served as Vice President of the Company since October
1995 and as a Director since February 1996. Prior to that he was the Finance
Manager of PureTec from
17

<PAGE>

1993 to March 1995. From 1990 until 1993, Mr. Mastroianni was employed by
Merrill Lynch as a financial analyst and systems liaison. From 1987 until 1990
he was a financial analyst and systems liaison at Prudential Insurance.

Mr. Katz has served as a Director of the Company since February 1996.
Mr. Katz has served as President of PureTec since August 1988 and as a director
of that company since September 1991 and he was appointed Chief Operating
Officer in March 1994. From 1987 until August 1988 he was an independent
consultant to contract and food and beverage packers. From 1982 until 1987, he
was Vice President and operations director for Taylor Wine Company and was
responsible for operation, distribution, purchasing and maintenance of the plant
owned by Taylor Wine Company in Hammondsport, New York. From 1977 until 1982, he
was U.S. manager of packaging for the Coca-Cola Company in Atlanta, Georgia.

There are no family relationships between any of the executive officers
and directors.

Committees of the Board

The Company's Board does not currently have an audit, compensation or
other committee.

Item 11. EXECUTIVE COMPENSATION

The following table sets forth the compensation paid or accrued by the
Company during the three fiscal years ended December 31, 1996 to its Chief
Executive Officer and key employees of the Company who received compensation in
excess of $100,000 during these periods.

Restricted
Stock Stock
Name Year Salary Awards Options

Michael Nafash 1996 $120,674 -- --
1995 -- 90,000 99,000
1994 -- -- --

Howard Katz 1996 134,100 -- --
1995 -- -- --
1994 -- -- --

Arnold Feldman 1996 124,038 -- --
1995 -- -- --
1994 -- -- --

Steven Moskowitz 1996 121,154 -- --
1995 -- -- --
1994 -- -- --

Robert O'Brien 1996 -- -- --
1995 -- 5,000 --
1994 -- 5,000 --

<PAGE>

Robert O'Brien resigned as President and CEO of the Company in July
1995. Michael Nafash was appointed to those positions at that time.

Director's Compensation

Directors of the Company receive stock options for serving as
directors.

Stock Options / Stock Appreciation Rights

There were no exercises of stock options by the above-named officers in
the year ended December 31, 1996.

Item 12. VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF

The table below sets forth, as of September 15, 1997, information
regarding the beneficial ownership of the Company's Common Stock based upon the
most recent information available to the Company for (i) each person known by
the Company to own beneficially more than five percent (5%) of the Company's
outstanding Common Stock, (ii) each of the Company's officers and directors and
(iii) all officers and directors of the Company as a group. Unless otherwise
indicated, the address for all parties is c/o the Company, 266 Harristown Road,
Glen Rock, New Jersey 07452.

Name Number of Shares Percentage
- ---- ----------------- ----------
PureTec Corporation 2,659,312 40.6%
Direct Connect International, Inc. (1) 769,500 11.7%
Norman Moskowitz (2) 700,000 5.8%
Samax Technology, Inc. (3) 340,000 5.2%
Michael Nafash (4) 336,383 5.1%
All current officers and directors
as a group (5) 336,383 5.1%

- --------------------------------------------

(1) Does not include 360,000 shares of common stock issuable upon the exercise
of stock options at $3.50 per share and does not include 400,000 shares of
common stock issuable upon the exercise of stock options at $2.50.
(2) Does not include 100,000 shares of common stock issuable upon the exercise
of stock options at $3.50 per share.
(3) Does not include 170,000 shares of common stock issuable upon the exercise
of stock options at $3.50 per share.
(4) Does not include 99,000 shares of common stock issuable upon the exercise
of stock options at $3.50 per share.
(5) Effective May 12, 1997, Michael Nafash was the only remaining member of the
Board of Directors.

<PAGE>

Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than ten
percent of the Company's Common Stock, to file with the Securities and Exchange
Commission initial reports of ownership and reports of changes in ownership of
Common Stock and other equity securities of the Company. To the Company's
knowledge, based on information furnished to the Company, all applicable Section
16(a) filing requirements for 1996 were met.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

During 1995 PureTec contributed to the Company securities and cash
with a total value of $2,225,000 in exchange for 2,659,312 shares of Common
Stock of the Company as adjusted for the 0.033-for-1 stock split.

On July 24, 1995, the Company acquired EVO, a majority owned subsidiary
of PureTec. The transaction was consummated by merging a wholly owned subsidiary
of the Company into EVO. In connection with the merger, Michael Nafash,
President of EVO, was elected to the Company's Board and was appointed the
Company's President and Chief Executive Officer. Robert O'Brien resigned as the
Company's President but remained on the Company's Board. The parties agreed that
upon meeting the shareholder information requirements of Rule 14(f) under the
Securities Exchange Act of 1934, David C. Katz, President of PureTec, and Paul
Litwinczuk, an executive officer of PureTec would be elected to the Company's
Board. The shareholder information requirement was completed on February 2,
1996.

In exchange for the merger, the Company issued or will issue an
aggregate of 3,552,489 shares of the Company's Common Stock to the holders of
EVO Common Stock, consisting of 2,659,312 shares to PureTec and 893,177 shares
to other shareholders of EVO. As a result of this transaction and the subsequent
issuance of additional shares, PureTec held approximately 74% of the Company's
Common Stock at December 31, 1995. As of December 31, 1996, PureTec owns 40.6%
of the outstanding common stock of the Company.

<PAGE>

PART IV

Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K

(a) 1. and 2. Financial Statements and Schedules

The financial statements are listed in the Index to Financial Statements on
page F-1 and are filed as part of this annual report.

3. Exhibits

The Index to Exhibits following the Signature Page indicates the exhibits
which are filed herewith and the exhibits which are incorporated herein by
reference.

(b) Reports on Form 8-K

There were no Reports on Form 8-K filed during the last quarter of the fiscal
year ended December 31, 1996.

<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.

EVOLUTIONS, INC.

/s/ Michael Nafash
---------------------------------
By: Michael Nafash
Chief Executive Officer, President
and Chief Financial Officer

Dated: September 19, 1997

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below as of September 15, 1997 by the following persons
on behalf of Registrant and in the capacities indicated.

/s/ Michael Nafash Dated:September 19, 1997
- ------------------ ------------------------
Michael Nafash, Director, CEO, CFO and
President

<PAGE>

EXHIBITS

Except where otherwise indicated, the following exhibits are incorporated by
reference to the exhibits in documents previously filed with the Securities and
Exchange Commission:

2.01 Agreement and Plan of Merger, dated July 21, 1995 by and among the
Company, Evolutions, Inc. (NJ), GSC Acquisition Corporation and Robert
O'Brien(1)
2.02 Agreement and Plan of Merger dated February 6, 1996, between Gold
Securities Corporation and Evolutions, Inc.(2)
3.01 Certificate of Incorporation as amended(2)
3.02 Amended and Restated Bylaws(3)(5)
10.01Form of 1996 Stock Option Plan(2)
10.02Agreement dated as of September 27, 1995 by and among Gold Securities
Corporation, Evolutions, Inc., Kidsview, Inc., Direct Connect
International Inc., and Amerawell Products Limited(4)
10.03Management Agreement dated September 27, 1995 by and between
Kidsview, Inc. and Direct Connect International Inc.(4)
10.04Agreement of Sale dated February 26, 1996 among Evolutions, Inc.,
Smart Style Acquisition Corp., Lions Acquisition Corp., Smart Style
Industries, Inc., Classic Craft, Inc. and Lions Manufacturing, Inc.(5)
10.05License Agreement dated February 26, 1996, by and between Evolutions,
Inc. and H.W. Carter & Sons, Inc.(5)
17.01Resignation of Board of Directors during the period April 16 through
May 12, 1997.(6)
- --------------------------------------------

(1) Incorporated by reference to a Current Report on Form 8-K by Gold
Securities Corporation dated August 2, 1995 (File No. 1-8958)
(2) Incorporated by reference to an Information Statement by Gold
Securities Corporation dated January 8, 1996 (File No. 1-8958)
(3) Incorporated by reference to the Company's Registration Statement on
Form 8-B declared effective March 4, 1996 (File No. 0-27788)
(4) Incorporated by reference to the Company's Current Report on Form 8-K
dated October 10, 1995 (File 0-27788)
(5) Incorporated by reference to the Company's Current Report on Form 8-K
dated March 11, 1996 (File 0-27788)
(6) Incorporated by reference to the Company's Current Report on Form 8-K
dated June 10, 1996 (File 0-27788)

<PAGE>

EVOLUTIONS, INC AND SUBSIDIARIES

REPORT OF CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 1996 (UNAUDITED) AND 1995
AND THE PERIOD JANUARY 21, 1994 (INCEPTION) TO DECEMBER 31, 1994

CONTENTS

Page

Consolidated Balance Sheets as of
December 31, 1996 (unaudited) and 1995 F-1

Consolidated Statements of Operations for the years ended December 31, 1996
(unaudited) and 1995 and the period January 21, 1994 (inception) to
December 31, 1994 F-2

Consolidated Statement of Stockholders' Equity for the years ended December 31,
1996 (unaudited) and 1995 and the period January 21, 1994 (inception) to
December 31, 1994 F-3

Consolidated Statements of Cash Flows for the years ended December 31, 1996
(unaudited) and 1995 and the period January 21, 1994 (inception) to
December 31, 1994 F-4

Notes to consolidated financial statements F-5

<PAGE>
EVOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>

December 31,
--------------------------------
ASSETS 1996 1995
-------------- --------------
(Unaudited)
<S> <C> <C>

CURRENT ASSETS:
Cash and cash equivalents $ 222,284 $ 11,508
Due from agent (Note 5) 318,000 --
Due from broker -- 280,851
Investments in available-for-sale securities
(Note 4) 7,173 762,119
Accounts receivable 358,142 183,689
Due from factor 257,687
Inventories 5,246,163 --
Prepaid expenses and other current assets 207,659 15,000
------------ ------------
6,617,108 1,253,167

PROPERTY, PLANT AND EQUIPMENT, net (Note 7) 504,087 89,147
GOODWILL, net of accumulated amortization (Note 2c) -- 261,262
LICENSES, net of accumulated amortization (Note 2c) -- 976,190
OTHER ASSETS 50,693 --
------------ ------------
$ 7,171,888 $ 2,579,766
============ ============

LIABILITIES and STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Due to factor (Note 8) $ 1,138,421 $ --
Payroll taxes payable (Note 9) 935,659 --
Accounts payable 5,604,688 664,866
Accrued expenses 1,721,246 168,311
Accrued compensation -- 112,500
Bridge notes payable (Note 10) 850,000 --
Loans payable (Note 11) 143,719 809,500
Long-term debt in default (Note 12) 841,776 --
------------ ------------
11,235,509 1,755,177
------------ ------------

COMMITMENTS (Notes 20)

STOCKHOLDERS' EQUITY: (Notes 3 and 13)
Common stock, $.01 par value; 50,000,000 shares authorized;
6,562,280 issued and outstanding at December 31, 1996 65,623 --
Common stock, no par value, 50,000,000 shares
authorized; 3,599,553 issued and outstanding
at December 31, 1996, stated at -- 3,392,035
Preferred stock; authorized 5,000,000 shares;
-0- issued and outstanding -- --
Additional paid-in capital 9,469,585 --
Deficit (13,584,610) (1,944,490)
Unrealized holding loss on securities available-for-sale (10,269) (622,956)
(Note 4)
Treasury stock (3,950) --
------------ ------------
(4,063,621) 824,589
------------ ------------

$ 7,171,888 $ 2,579,766
============ ============
</TABLE>

See notes to financial statements
F-1
<PAGE>
<TABLE>

EVOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended Period
December 31, January 21, 1994
--------------------------------- (Inception) to
1996 1995 December 31, 1994
--------------- -------------- ------------
(Unaudited)
<S> <C> <C> <C>

REVENUES $ 21,521,910 $ 571,326 $ 124,281

COST OF SALES 17,078,057 433,782 216,389
------------ ------------ ------------

GROSS PROFIT 4,443,853 137,544 (92,108)
------------ ------------ ------------

COSTS AND EXPENSES:
Selling, general and administrative 5,023,238 832,379 94,205
Advertising and promotion 4,677,748 143,813 133,040
Amortization 318,177 60,169 --
Bad debt expense 56,751 199,195 --
------------ ------------ ------------

10,075,914 1,235,556 227,245
------------ ------------ ------------

OPERATING LOSS (5,632,061) (1,098,012) (319,353)
------------ ------------ ------------

OTHER:
Write-off of intangible assets 2,809,145 -- --
Write-off of fixed assets 1,844,135 -- --
Loss on sale of securities 594,189 407,538 60,874
Interest expense 766,433 98,319 3,573
Interest income (5,843) (917) (42,262)
------------ ------------ ------------

6,008,059 504,940 22,185
------------ ------------ ------------

NET LOSS ($11,640,120) ($ 1,602,952) ($ 341,538)
============ ============ ============

NET LOSS PER SHARE (Note 13) $ (1.77) $ (.52) $ (.27)
============ ============ ============

Weighted average number of common
share outstanding (Note 13) 6,562,281 3,079,358 1,265,297
============ ============ ============

</TABLE>

See notes to financial statements

F-2
<PAGE>
<TABLE>
EVOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(SEE NOTES 3 AND 13)
Unrealized
<CAPTION>
Common Shares Loss on
----------------------------------------- Additional Available-
Common, Common, Common, Paid-in for-Sale Treasury
$10 Par No Par $.01 Par Amount Capital Deficit Securities Stock Total
------- ------ -------- ------ ------- ------- ----------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>

Initial capital-
ization,
Janurary 21, 1994 200 $-- $-- $ 2,000 $ 23,000 $-- $-- $-- $ 25,000
Issuance of stock
to parent 800 -- -- 8,000 842,000 -- -- -- 850,000
Unrealized holding
loss on available-
for-sale
securities
(Note 4) -- -- -- -- -- -- (70,394) -- (70,394)
Net loss -- -- -- -- -- (341,538) -- -- (341,538)
------ ---------- --------- ----------- ----------- ----------- --------- ------- ------------

Balance,
December 31, 1994 1,000 0 0 10,000 865,000 (341,538) (70,394) 0 463,068

Issuance of stock
to parent 850 -- -- 8,500 1,916,500 -- -- -- 1,925,000
Surrender of stock (200) -- -- (2,000) 2,000 -- -- -- 0
Capital contribution -- -- -- -- 300,000 -- -- -- 300,000
Merger with Gold
Securities Inc.
(Note 3a) (1,650) 3,550,053 -- 3,300,535 (3,083,500) -- -- -- 217,035
Issuance of stock
in connection with
asset acquisition
(Note 3b) -- 49,500 -- 75,000 -- -- -- -- 75,000
Change in unrealized
holding loss on
available-for-sale
securities (Note 4) -- -- -- -- -- -- (552,562) -- (552,562)
Net Loss -- -- -- -- -- (1,602,952) -- -- (1,602,952)
------ ---------- --------- ----------- ----------- ----------- --------- ------- ------------
Balance,
December 31, 1995 0 3,599,553 0 3,392,035 0 (1,944,490) (622,956) 0 824,589
(Unaudited)
Adjustments for
reverse split -- 6,236 -- -- -- -- -- -- 0
Merger to affect
change of state
of incorporation -- (3,605,789) 3,605,789 (3,355,977) 3,355,977 -- -- -- 0
Issuance of stock
in connection
with asset
acquisition
(Note 3c) -- -- 845,000 8,450 1,194,550 -- -- -- 1,203,000
Issuance of common
shares for payment
of accrued bonuses -- -- 125,000 1,250 111,250 -- -- -- 112,500
Issuance of securi-
ties in private
placements for
cash, net -- -- 1,832,500 18,325 4,559,348 -- -- -- 4,577,673
Issuance of securi-
ties in conversion
with debentures -- -- 153,991 1,540 248,460 -- -- -- 250,000
Change in unrealized
holding loss on
available- for-sale
securities (Note 4) -- -- -- -- -- -- 612,687 -- 612,687
Repurchase of shares -- -- -- -- -- -- -- (3,950) (3,950)
Net loss -- -- -- -- -- (11,640,120) -- -- (11,640,120)
------ ---------- --------- ----------- ----------- ----------- --------- ------- ------------

Balance,
December 31, 1996 0 0 6,562,280 $ 65,623 $ 9,469,585 ($13,584,610) ($ 10,269) ($3,950) ($ 4,063,621)
====== ========== ========= =========== =========== =========== ========= ======= ============
</TABLE>

See notes to financial statements

F-3
<PAGE>
<TABLE>
EVOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended Period
December 31, January 21, 1994
------------------------------- (Inception) to
1996 1995 December 31, 1994
-------------- -------------- -----------------
(Unaudited)
<S> <C> <C> <C>

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($11,640,120) ($ 1,602,952) ($ 341,538)
------------ ------------ ------------
Adjustments to reconcile net loss to net cash used in operating activities:
Write-off of intangible assets 2,638,145 -- --
Write-off of fixed assets 1,844,135 -- --
Bad debt expense 56,751 199,195 --
Depreciation and amortization 554,015 102,482 1,653
Non-cash compensation -- -- 25,000
Loss on sale of securities 594,189 407,538 60,874
Non-cash interest income -- -- (37,500)
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (231,204) (183,689) --
Prepaid expenses and other (207,659) -- --
Due from contractor -- (381) (148,814)
Due from agent (318,000) -- --
Due from factor 242,313 -- --
Inventory (3,857,991) 9,000 (9,000)
Other assets (50,693) -- --
Increase in liabilities:
Accounts payable 3,668,857 634,455 30,814
Accrued expenses 1,555,456 119,171 48,140
Payroll taxes payable 935,659 -- --
Accrued compensation -- 112,500 --
------------ ------------ ------------
Total adjustments 7,423,973 1,400,271 (28,833)
------------ ------------ ------------
Net cash used in operating activities (4,216,147) (202,681) (370,371)
------------ ------------ ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (802,612) (124,849) (8,264)
Increase in due from broker 280,851 (280,851) --
Proceeds from sales of securities 773,444 486,165 1,205,170
Additions to licenses (100,000) -- --
Purchases of available-for-sale securities -- (4,000) (878,322)
Increase in loans receivable -- (1,100,000) (50,000)
Repayment of loans receivable -- 150,000 --
Increase in note receivable-officer -- -- (40,000)
Repayment in note receivable 15,000 25,000 --
Net cash paid for Smart Style acquisition (1,038,237) -- --
Net cash paid for Gold acquisition -- (54,989) --
------------ ------------ ------------
Net cash (used in) provided by
investing activities (871,554) (903,524) 228,584
------------ ------------ ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings from factor 638,421 -- --
Proceeds from debt borrowings 4,013,583 795,000 14,500
Repayments of debt (2,605,250) -- --
Loan from related party -- -- 54,000
Repayment to related party -- -- (54,000)
Net proceeds from issuance of stock 3,255,673 -- 150,000
Capital contribution -- 300,000 --
Repurchase of treasury stock (3,950) -- --
------------ ------------ ------------
Net cash provided by financing activities 5,298,477 1,095,000 164,500
------------ ------------ ------------

Net increase (decrease) in cash 210,776 (11,205) 22,713
Cash and cash equivalents at beginning of period 11,508 22,713 --
------------ ------------ ------------

Cash and cash equivalents at end of period $ 222,284 $ 11,508 $ 22,713
============ ============ ============
</TABLE>

See notes to financial statements

F-4
<PAGE>

EVOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 1996 (Unaudited) AND 1995 AND THE PERIOD
JANUARY 21, 1994 (INCEPTION) TO DECEMBER 31, 1994

1. Nature of Operations

Evolutions, Inc. (the "Company" or "Evolutions") was formed on January
21, 1994 and is engaged in the manufacturing and marketing of apparel and the
marketing of a line of toy animals.

The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. Intercompany balances and
transactions have been eliminated. See Note 3a with respect to the Gold
Securities Corporation merger and the basis of presentation.

On May 15, 1997, the apparel subsidiaries' secured lender, Heller
Financial, Inc., foreclosed on substantially all of the assets of the apparel
subsidiaries. Effective June 6, 1997, the apparel subsidiaries filed for
protection under Chapter 11 of the Bankruptcy Code. (see Note 8).

On July 15, 1997, the license for KVI's rights to market TEA BUNNIES
(Trademark) were foreclosed on by the licensor.

The consolidated financial statements for the year ended December 31,
1996 are unaudited and have been prepared in accordance with generally accepted
accounting principles. In the opinion of management all adjustments (which
include only normal recurring accruals) necessary to present fairly the
financial position, results of operations and cash flows have been included. Due
to the Company's financial position, the Company did not have the monies
necessary to have Holtz Rubenstein & Co., LLP, independent public accountants
for the past fiscal year, complete the audit.

2. Summary of Significant Accounting Policies

a. Inventories

Inventories are valued at the lower of cost (first-in, first-out
method) or market.

b. Revenue recognition

The Company's revenue is from the sale of apparel and toys. The Company
recognizes revenues as products are shipped.

F-5

<PAGE>

c. Depreciation and amortization

Depreciation is computed using the straight-line method over the
estimated useful lives of the related assets.

Intangible assets are amortized using the straight-line method over the
following periods:
Goodwill 10 years
Licenses 7 years

The goodwill was acquired when the Company purchased Smart Style
Industries Inc. and Affiliates (see Note 3c). Substantially all of the assets
related to this purchase were foreclosed upon on May 15, 1997 (see Note 8) and
the goodwill was written-off.

The licenses were for KVI's rights to manufacture TEA BUNNIES
(Trademark). On July 15, 1997, the licensor terminated KVI's rights to the
license and the license was written-off.

d. Income taxes

The Company provides for Federal and State income taxes based upon
financial accounting income. Deferred income taxes are recorded in instances
where transactions are included in different periods for financial reporting and
income tax purposes.

e. Statements of cash flows

For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.

f. Marketable securities

Trading securities consist of equity securities held for the purpose of
selling in the near term. They are reported at fair market value, with
unrealized gains and losses included in earnings.

Available-for-sale securities are carried at fair value with the
unrealized holding gain (loss) included in stockholders' equity. A decline in
the market value of any available-for-sale security below cost that is deemed
other than temporary is charged to earnings resulting in the establishment of a
new cost basis for the security.

F-6

<PAGE>

g. Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

h. Reclassifications

Certain reclassifications have been made to the financial statements
for the periods ended December 31, 1995 and 1994 to conform with the
classifications used in 1996.

3. Business Combinations

a. Gold Securities Corporation

On July 24, 1995, Gold Securities Corporation ("Gold") acquired
Evolutions by merging a wholly-owned subsidiary, GSC Acquisition Corporation,
into the Company. The holders of Evolutions' stock received an aggregate of
330,000 shares of Gold common stock and the right to receive an additional
2,932,089 upon shareholder approval to increase Gold's authorized number of
shares. As a result of this transaction, voting and management control of the
Company was transferred to the shareholders of Evolutions. This transaction has
been accounted for as a reverse acquisition with Evolutions deemed the acquiree.
In addition, the Company paid a $75,000 finder's fee in connection with this
transaction.

As a result of this transaction, the following was recorded at July 24,
1995:

Cash $ (55,000)
Goodwill 272,600
-----------
$ 217,600
===========

Accrued expenses $ 600
Common stock 3,000,600
Additional paid-in-capital (2,783,600)
-----------
$ 217,600
===========

F-7

<PAGE>

b. Direct Connect International

On September 27, 1995, Kidsview, Inc. ("KVI"), a wholly-owned
subsidiary of Evolutions, purchased the rights and interest in certain product
lines of Direct Connect International Inc. ("DCI"), a distributor of infant,
preschool, and general soft toy products. Consideration consisted of the
cancellation of loans aggregating $950,000 and issuing 49,500 shares of the
Company's common stock. DCI is entitled up to an additional 132,000 shares of
the Company's common stock based upon certain performance levels of the product
lines over the next two years.

As part of the agreement, DCI is managing the product lines for a
specified period, for which it receives an amount equal to its monthly operating
costs. The agreement provides for a maximum monthly fee of $85,000. These
management services include the services of DCI's president. The first $150,000
of fees were offset against DCI's indebtedness to EVO under a secured note. Fees
under this agreement approximated $900,000 and $300,000 for the years ended 1996
and 1995, respectively.

As an inducement for the Company to enter into this agreement, DCI will
issue to Evolutions warrants to purchase 100,000 shares of its stock at an
exercise price of $.10 and 250,000 shares of its stock at an exercise price of
$.20. No value was assigned to these warrants.

As a result of this transaction, the following was recorded at
September 27, 1995:

Licenses $ 1,025,000
Prepaid management fees 150,000
Notes receivable (1,100,000)
-----------
$ 75,000
===========

Common stock $ 75,000
===========

c. Business acquisition

On February 26, 1996, the Company acquired certain assets of Smart
Style Industries Inc. and Affiliates (the "Seller"), a North Carolina-based
apparel manufacturer. Consideration, as amended, consisted of (i) $1,125,000
cash, (ii) a 30 day $500,000 promissory note, (iii) the assumption of
liabilities approximating $1,200,000, and (iv) 700,000 shares of the Company's
Common Stock. The Company also issued warrants to the Seller to purchase 100,000
shares of the Company's Common Stock.

F-8

<PAGE>

The Company operates these assets through its wholly-owned subsidiaries,
Smart Style Acquisition Corp. and Lions Holding Corp. (Collectively "SSA"). The
Company's line of recycled apparel products ("EVO") will be combined with the
operations of SSA.

In connection with the purchase, SSA entered into a license agreement
for the right to use certain trademarks.

In addition, SSA entered into a five-year employment agreement with an
officer of the Seller which provides for minimum annual salary of $150,000. The
employee was also issued 20,000 shares of common stock. The employee resigned
from SSA in April 1997.

As a result of this transaction, the following was recorded at February
26, 1996 (unaudited):

Inventories $1,388,172
Property, plant and equipment 1,606,000
Goodwill 1,443,871
----------
$4,438,043
==========

Accounts payable $1,030,404
Accrued expenses 250,000
Loans payable 72,222
Mortgage payable 460,417
Common Stock 7,000
Additional Paid-in-Capital 2,618,000
----------
$4,438,043
==========
Pro-forma consolidated information assuming these transactions had
taken place as of January 21, 1994 is as follows:

Period
Years Ended January 21, 1994
December 31, (Inception) to
------------------------ December 31,
1996 1995 1994
------------- ------------- ----------
(Unaudited)

Revenues $ 23,382,670 $ 11,125,697 $ 13,269,727
Net loss (11,246,460) (2,999,752) (894,783)
Net loss per share (1.71) (.84) (.71)
Weighted average number
of shares outstanding 6,562,281 3,574,358 1,265,297
F-9

<PAGE>

d. License Agreement

On September 9, 1996, KVI entered into a license agreement with Sandbox
Entertainment, Inc. ("SEI") with respect to Pillow People (Trademark) stuffed
toy and doll products. The license is exclusive and KVI can only sell Pillow
People (Trademark) in the United States, its territories and possessions and
Canada. However, the license grants KVI worldwide manufacturing rights. The
license expires on December 31, 1998. KVI has the option of renewing the license
for one three-year term, upon 60 day notice prior to the end of the initial
term. The royalty rate ranges from 6% to 10% based on sales in the United States
and from 8% to 10% based on FOB sales. Pursuant to the license agreement, KVI
made an advance payment to SEI of $50,000 with a minimum guarantee, due by the
end of the initial term, of $200,000. With respect to renewal of the license
agreement, KVI will be obligated to make an advance payment, due on the first
day of the renewal term, of $100,000 with a minimum guarantee, due by the end of
the renewal term, of $400,000.

4. Investments in Available-for-Sale Securities

Investments in available-for-sale securities consist of the following:

December 31,
1996 1995
--------- --------
(Unaudited)
PureTec International common stock $ -- $575,000
Other equity securities 7,173 187,119
-------- --------
$ 7,173 $762,119
======== ========

Gross unrealized gains and gross unrealized losses pertaining to
marketable securities were as follows:
December 31,
1996 1995
--------- --------
(Unaudited)
Gains $ -- $ 81,419
Losses (10,269) (704,375)
--------- ---------
$ (10,269) $(622,956)
========= =========

F-10

<PAGE>

Proceeds from the sale of marketable securities available-for-sale and the
resulting loss were:
<TABLE>
<CAPTION>

Period January 21, 1994
Years Ended December 31, (Inception) to
1996 1995 December 31, 1994
-------------------- ---------------------- -----------------
(Unaudited)
Gain Gain Gain
Proceeds (Loss) Proceeds (Loss) Proceeds (Loss)
-------- --------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>

Total gain $ 637,794 $ 16,957 $ 130,249 $ 38,448 $ 1,003,883 $ 24,925
Total loss 135,650 (611,146) 355,916 (445,986) 201,287 (85,799)
--------- --------- --------- ----------- ----------- --------
$ 773,444 $(594,189) $ 486,165 $ (407,538) $ 1,205,170 $(60,874)
========= ========= ========= =========== =========== ========
</TABLE>

5. Due from Agent

Due from agent represents funds held by the Hong Kong-based agent of
KVI.

6. Inventories

Inventories consist of the following at December 31, 1996 (Unaudited):

Raw Materials $1,170,968
Work-in-process 1,036,570
Finished goods 3,038,625
----------
$5,246,163
==========

7. Property, Plant and Equipment

Property, plant and equipment, at cost, consist of the following:
December 31,
1996 1995
----- -----
(Unaudited)
Buildings and improvements $350,000 $ --
Machinery and equipment 220,000 --
Molds -- 118,884
Office equipment 14,229 14,229
----------- -----------
584,229 133,113
Less accumulated depreciation 80,142 43,996
------------ ------------
$504,087 $ 89,147
========== =========

The building was SSA's manufacturing facility. On July 29, 1997, the
building was foreclosed on by SSA's lender. The building's valued was determined
by an independent appraiser.

F-11

<PAGE>

Additionally, machinery and equipment related to SAA's business
activity. The machinery and equipment are valued at $220,000. On May 15, 1997,
the assets were foreclosed upon (see Note 8) by SSA's secured lender and were
subsequently auctioned for approximately $220,000.

The molds were used for the production of TEA BUNNIES (Trademark) by
KVI. As KVI could no longer make royalty payments to the license holder, the
licensee terminated KVI's rights to the license. The molds have no value.

8. Due to Factor

In February 1996, SSA entered into a financing agreement with First
Factors Corporation whereby SSA may take advances on their uncollected accounts
receivable up to a limit of 90%. This facility was terminated by SSA on July 2,
1996. In July 1996, SSA and EVO, entered into a financing agreement with Heller
Financial, Inc. ("Heller") whereby SSA may take advances on both subsidiaries'
uncollected accounts receivable up to a limit of 90%. SSA may over advance on
this facility by up to $1,000,000. Interest accrues at the prime rate plus 1%.
Additionally, a fee of 0.75% is due on invoices assigned. The facility can be
canceled by either party on sixty days written notice. This facility is
collateralized by the accounts receivable and finished goods inventory of SSA
and EVO and guaranteed by the Company. This facility supersedes the facility
entered into in February 1996 between the SSA and First Factors, Inc. As part of
the agreement, Heller has indemnified First Factors, Inc. against all
outstanding over advances and uncollected accounts receivable.

In April 1996, KVI entered into a financing agreement with Heller
whereby KVI may take advances on uncollected accounts receivable up to a limit
of 90%. Interest accrues on monies advanced at the prime rate plus 2%.
Additionally, a fee of 1% is due on amounts advanced. This facility is
guaranteed by the accounts receivable and domestic inventory of KVI and also by
the Company. Because of the bankruptcy proceedings with SSA, Heller advised KVI
that it would no longer make advances to KVI (see Note 20).

On May 15, 1997, Heller foreclosed on substantially all of the assets of
SSA. Effective, June 6, 1997, the subsidiaries filed for protection under
Chapter 11 of the Bankruptcy Code. SSA is in the process of actively seeking the
return of preference payments made ninety days prior to the bankruptcy. Proceeds
will be used for secured creditors and any remaining balance will be distributed
to priority creditors.

9. Payroll Taxes Payable

Payroll tax payable includes delinquent federal and state payroll tax
installments of approximately $810,000 and accrued penalties and interest of
approximately $125,000 thereon.

F-12

<PAGE>

10. Bridge Notes Payable

In 1996, the Company borrowed an aggregate of $3,450,000 from various
outside sources (the "Bridge Lenders"). The Bridge Lenders received short-term
notes for the face amount of the loans bearing interest at 8% per annum. In
addition, the Company issued to the Bridge Lenders and loan facilitators
warrants to purchase a total of 4,575,000 shares of the Company's Common Stock.
The warrants have an exercise price of $3.50 per share of stock purchased and
expire five years from the date of issuance. The Company recorded an interest
charge of $42,000 related to these warrants.

In May 1996, the Company borrowed an additional $100,000 on terms
identical to the original Bridge Notes and used those proceeds to repay some of
the expiring Bridge Notes.

In October 1996, $100,000 of Bridge Notes were converted into the
private placement and, in addition, the Company converted $400,000 of Bridge
Notes into a Convertible Note bearing interest at 8%. The terms allow the holder
to convert the Convertible Note into the private placement until the due date on
April 22, 1997. The balance of the Bridge Notes totaling $450,000 have been
converted into Demand Notes. The Convertible Notes and Demand Notes are
currently in default.

11. Loans Payable

At December 31, 1996, the Company had loans payable and accrued
interest of approximately $148,000 consisting of secured notes to relatives and
affiliates of Michael Nafash, CEO, President and a Director of the Company. The
notes are due on demand and bear interest at the rate of 12% per annum. The
notes are secured by 25,000 shares of Glasgal Communications Inc. common stock
and all other marketable securities held by the Company. On May 29, 1997, the
noteholder foreclosed on the collateral and has since accepted the collateral as
full payment of the debt. At that date, the collateral had a market value of
approximately $100,000.

12. Long-Term Debt in Default

Long-term debt consists of the following at December 31, 1996
(Unaudited):

Mortgage payable, bearing interest
at prime plus 1 1/2%, payable in monthly
installments of $4,167 plus interest
through May 1999 at which time a balloon
payment of approximately $604,000 is due,
collateralized by land and building of SSA $716,667

Equipment note, bearing interest at 17%,
payable in monthly installments of
$3,081, including interest through
September 1999, collateralized by certain
equipment of SSA 80,665
(Continued)
F-13

<PAGE>

(Continued)
Note payable, bearing interest at prime
plus 3/4%, payable in monthly
installments of $2,778 plus interest
through April 1998, collateralized by
machinery and equipment of SSA. 44,444
----------
841,776
Less current portion 108,420
----------
$ 733,356
==========

SSA is in default of its current portion of long-term debt. Therefore,
all of the debt is classified as current liabilities.

13. Stockholders' Equity

a. Capitalization

The Company's authorized capital consists of 50,000,000 shares of
common stock with $.01 par value and 5,000,000 shares of preferred stock. The
terms and rights of the preferred shares will be determined by the Board of
Directors at the time of issuance.

b. Reverse stock split

On February 2, 1996, the Company's shareholders authorized a .033 for
one reverse stock split of common stock outstanding. All per share and weighted
average share amounts have been restated to reflect this stock split.

c. Initial capitalization

In January 1994, the Company issued 200 shares to the founding
shareholders in consideration for services provided. The services and shares
were valued at $25,000.

d. Issuance of shares to PureTec

In June 1994, the Company issued 800 shares of common stock
(representing 80% of the outstanding shares) to PureTec Corporation ("PureTec")
for $150,000 cash and 153,850 shares of PureTec's common stock (valued at
$700,000). The 153,850 shares represented approximately 1% of PureTec's
outstanding common stock. The Company sold these shares in July 1994 for net
proceeds approximating $700,000.

In March 1995, the Company issued an aggregate of 850 shares of common
stock and 55 stock options ("1995 options") to PureTec and certain of its
officers for 350,000 shares of PureTec common stock (valued at $5 1/2 per share,
the trading price of PureTec stock on the date of the transaction). The
F-14

<PAGE>

350,000 shares represented approximately 2% of PureTec's outstanding common
stock. Concurrently, the founding shareholders surrendered 200 shares of common
stock and outstanding options in exchange for 165 stock options ("1995
options"). The 1995 options, as adjusted for the merger and reverse stock split,
provide for the issuance of 400,000 shares at $.30 per share.

As of December 31, 1996, PureTec holds 41% of the Company's outstanding
common stock.

e. Capital contribution

In July 1995, PureTec made a $300,000 cash contribution to the Company.

f. Private placements

In March 1996, the Company offered a private placement of its
securities. The placement consists of 500,000 Units at a purchase price of $5.00
per Unit. Each Unit consists of two shares of the Company's Common Stock and one
Stock Purchase Warrant to acquire one share of the Company's Common Stock at an
exercise price of $3.50. The Stock Purchase Warrants will expire five years from
the date of issue. As of December 31, 1996, the Company had sold a total of
475,750 Units in this offering for total proceeds of $2,378,750. Of the funds
received, $1,900,000 were from the conversion of Bridge Note into the private
placements and the balance is direct investments in the private placement.

In May 1996, the Company commenced a second private placement of its
securities. The placement consists of 600,000 Units, each consisting of two
shares of the Company's Common Stock and one Stock Purchase Warrant to acquire
one share of the Company' Common Stock in exchange for $3.50, at a purchase
prince of $5.00 per Unit. The Stock Purchase Warrant will expire five years from
the date of issue. As of December 31, 1996, the Company had sold a total of
440,000 Units in this offering for total proceeds of $2,200,000. Of the funds
received, $100,000 was used for the repayment of Bridge Notes, and the balance
has been used for working capital.

One of the investors in the private placements was DCI. As part of the
consideration for their 160,000 Units, DCI transferred to Evolutions equity
securities of a publicly traded unrelated third party with a fair market value
of $800,000. The Company subsequently transferred these securities to repay
$800,000 of outstanding Bridge Loans (Note 10). The Company recognized no gain
or loss on these transactions.

g. Loss per share

Net loss per common share was computed by dividing the net loss by the
weighted average number of shares of common stock outstanding during each period
presented. The weighted average number of shares gives effect to the exchange of
Evolutions for Gold Securities.
F-15

<PAGE>

h. Reserved shares

Common shares reserved at December 31, 1996 are as follows:
1995 Options 100,000
1996 Stock Option Plan 500,000
-------
600,000
=======
i. Convertible Debentures

On August 15, 1996, the Company issued convertible debentures in the
principal amount of $250,000. The debentures carry an interest rate of 3.0% and
are due on December 31, 1996. The debentures are convertible, on or after
September 24, 1996, into Common Stock at a rate equal to 67% of the average bid
and ask price on the date of conversion. The funds raised through this financing
was exclusively used for the repayment of the Bridge Notes. On September 29,
1996, $50,000 of the proceeds was converted into 21,322 shares for the Company's
Common Stock. On December 31, 1996, the remaining balance of $200,000 was
converted into 132,669 shares of the Company's Common Stock.

14. Income Taxes

At December 31, 1996, the Company has a 100% valuation allowance
against the deferred income tax asset related to net operating loss carry
forwards.

15. Supplementary Information-Statement of Cash Flows

Cash paid for interest approximated $321,000 and $20,000 for the years
ended December 31, 1996 and 1995, and $3,600 for the period January 21, 1994
(inception) to December 31, 1994, respectively.

In January 1994, the Company issued common stock to the founding
shareholders for services provided (see Note 13d). In June 1994 and March 1995,
the Company issued common stock to PureTec for an aggregate of 503,850 shares of
PureTec common stock (See Note 13d). In October 1994, the Company received
marketable securities (valued at $37,500) as consideration for a loan made to a
third party.

During 1995, the Company loaned $1,100,000 to DCI under two notes. In
September 1995, $950,000 of the loan was canceled with the acquisition of
certain assets of DCI, and the remaining $150,000 was offset against a
management fee (see Note 3b).

F-16

<PAGE>

16. Fair Value of Financial Instruments

The Company has adopted Financial Accounting Standards Board Statement
No. 107, which required disclosures about the fair value of the Company's
financial instruments. The methods and assumptions used to estimate the fair
value of the following classes of financial instruments were:

Current Assets and Current Liabilities: The carrying amount of cash and
temporary cash investments, current receivables and payables and certain other
short-term financial instruments approximate their fair value.

Loans Payable: The carrying amount of loans payable, based on the
Company's current incremental borrowing rates for similar types of borrowing
arrangements, approximate their fair value.

The carrying amount and fair value of the Company's financial
instruments at December 31, 1996 are as follows:
Carrying Fair
Amount Value
Cash and cash equivalents $ 222,284 $ 222,284
Investments in available-for-sale securities 7,173 7,173
Other current assets 207,659 207,659
Accounts payable and accrued expenses 7,325,932 7,325,932
Loans payable 143,719 143,719

17. Major Customers

In 1996, the Company operated in two industry segments, apparel and
toys. In the apparel segment, one customer accounted for 11% of the total
apparel revenues. In the toy segment, two customers accounted for 30% and 27% of
the toy revenues. These same two customers accounted for 17% and 10%,
respectively, of total revenues in 1995. No single customer accounted for more
than 10% of revenues in 1994.

18. Advertising

KVI expenses the production costs of advertising the first time the
advertising takes place. Advertising expense approximated $4,129,000, $124,000
and $1,000 in 1996, 1995 and 1994, respectively.

F-17

<PAGE>

19. Industry Segments

The Company operates in two industry segments, apparel and toys.
Information concerning the Company's business segments as of December 31, 1996
(unaudited) is as follows:

Clothing Toys Consolidated

Revenues $ 12,432,880 $ 9,089,300 $ 21,521,910
Operating loss (2,810,781) (2,821,280) (5,632,061)
Identifiable assets 4,706,348 2,465,540 7,171,888
Depreciation and amortization 503,648 50,367 554,015
Capital expenditures 144,266 658,346 802,612

The Company operates in two industry segments, apparel and toys.
Information concerning the Company's business segments as of December 31, 1995
is as follows:

Clothing Toys Consolidated

Revenues $ 349,200 $ 22,100 $ 571,300
Operating loss (523,000) (575,000) (1,098,000)
Identifiable assets 1,359,900 1,219,900 2,579,800
Depreciation and amortization 14,000 88,500 102,500
Capital expenditures 5,900 118,900 124,800

In 1994, the Company operated solely in the apparel segment.

KVI's line of toys is manufactured in Asia and sold to North American
retailers and distributors.

20. Subsequent Events

In April 1997, SSA ceased its apparel manufacturing operations at it
Gastonia, GA location and laid off all employees involved in the manufacturing
process.

On April 30, 1997, SSA sold its Cutecumber (registered Trademark) line
to Snake Creek Manufacturing Co., Inc., for cash and a future royalty, all of
the proceeds which were made payable to Heller in accordance with SSA's
financing agreement with Heller.

Effective April 30, 1997, the management agreement between DCI and KVI
terminated. KVI has not generated any revenue since April 30, 1997 and there can
be no assurance that KVI will be successful in generating revenues in the
future.
F-18

<PAGE>

On May 2, 1997, the owner of the H.W. Carter Watch the Wear (Registered
Trademark) label terminated SSA's rights to the license.

On May 15, 1997, SSA's secured lender, Heller foreclosed on
substantially all of the assets. Effective June 6, 1997, the subsidiaries filed
for protection under Chapter 11 of the Bankruptcy Code. SSA is in the process of
actively seeking the return of preference payments made ninety days prior to the
bankruptcy. Proceeds will be used for secured creditors and any remaining
balance will be distributed to priority creditors.

On July 15,1997, the licensor of TEA BUNNIES (Trademark) terminated
KVI's rights to the license.

F-19

<PAGE>

<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 222,284
<SECURITIES> 0
<RECEIVABLES> 358,142
<ALLOWANCES> 0
<INVENTORY> 5,246,163
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<TOTAL-LIABILITY-AND-EQUITY> (4,063,621)
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<INCOME-CONTINUING> (11,640,120)
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<NET-INCOME> (11,640,120)
<EPS-PRIMARY> (1.77)
<EPS-DILUTED> (1.77)

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